"In 2017, Fitch expects brokers will continue to supplement organic revenue growth through selective acquisitions, including diversification efforts in employee benefits and data analytics," said
Operating performance and balance sheet strength will remain supportive of current ratings with a stable rating outlook for the brokers in Fitch's ratings universe. Fitch sees limited potential for rating changes over the next 12-18 months, despite expecting modest improvement in some credit fundamentals in 2017.
The fundamental sector outlook is stable as profitability remains favorable despite revenue pressure. Continued flat or declining premium rate changes in most commercial insurance segments and a soft reinsurance market will likely persist in 2017, pressuring brokers' organic growth. Revenues from diverse product and geographic platforms including cyber risk insurance and benefits consulting should help offset these headwinds. Strong customer retention and insured exposure growth from an improving domestic economy and acquisition integration will also aid revenue sustainability.
Fitch expects broker industry credit fundamentals to remain solid in 2017. Fitch's analysis of a peer group of publicly traded brokers reveals that on average profit margins have improved in 2016 despite pricing pressure and an increase in lower margin business, with just one of the five peers reporting reduced margins, partly from one-time items. Financial leverage was relatively stable with the exception of one peer's increase in acquisition-related debt, while interest coverage remains favorable and supportive of current rating levels. Debt maturities remain well laddered and free cash flow has increased partly due to reduced restructuring and pension expenses.
The full report '2017 Outlook:
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Criteria for Rating Non-Financial Corporates (pub.
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